Discovering profitable sources is like finding the goose that lays the golden eggs. You find new treasures in that nest every day.
Source-based marketing is the process of making those discoveries. In previous articles, we saw the advantage of focusing on sources from which customers come instead of on the individual consumers. Astounding growth can occur for the startup that finds 10 to 20 profitable sources at the very beginning. The fastest and most risk-free way to find these sources is to establish a testing process.
The final step of the process will be to determine if a tested source is profitable. When good sources are found, they should be fully funded and maximized until a steady flow of profitable work is established.
The key question now is, “How do you determine if a source is profitable?”
Advertising is essentially a process of buying customers. There should be no mystery to it. The questions come down to, “What return on investment are you willing to accept for each customer?” and “Which sources can provide them at the fastest rate?” Finding these answers all but assures your business success.
Note the two primary objectives to establishing a steady flow of new customers. First is to create an immediate flow of cash to pay the bills of both the company and the owner. The second is to create a sufficient base of repeating and referring clients to eventually eliminate the need for paid advertising.
When you have the results from a customer source test (explained in previous articles), it is time to calculate a return on investment (ROI) ratio to determine profitability. The ROI is a ratio that compares the revenue generated from the test to the total cost of running the ad.
The ratio would look like this:
(Total test revenue):(Total cost of ad)
Therefore, if the total money brought in was $500, and the total cost for the ad was $250, the ratio would then be:
$500:$250, which can be simplified to 2:1.
Another example shows revenue of $375 from an ad costing $300:
$375:$300, which simplifies to 1.25:1.
Once the ratio of a tested source is calculated, it can then be used to determine if it is profitable for the company. Look at where the ratio would fall on the accompanying profit chart, to get a general idea of what may be considered a good result for your company.
ROI profit chart
A 0:1 ratio results when a test produces no jobs. Unfortunately, this will occasionally be the result of some tests. Abandon this source as soon as the results are established.
A 1:1 result only brings in enough revenue to pay for the cost of the ad alone. Work performed at this ratio is done at a loss since it does not pay for any business costs or labor.
A 2:1 or better return is a good, profitable return for most owner-run companies. Any customer sources that can produce this return or better should be maximized until a steady flow of repeat and referral customers can eliminate the need for advertising altogether.
A 3:1 return is usually needed for employee-run companies. These companies generally have a much greater cost to run; thus they need a larger profit margin from their advertising.
If you can find sources that produce better returns, then those should be maximized first, and less profitable sources should be abandoned.
Critical points for startups
An ROI of 1.15:1 only provides enough revenue to pay basic costs of the ad, fuel and cleaning solutions.
For most companies this would not be worth continuing. But this return could be beneficial for a brand new company. It is important to be working in order to get experience and to possibly get referrals and repeat customers.
If you are a brand new company, consider accepting this ratio until enough better results can be found.
With a 1.5:1 return, a startup is producing enough to pay business expenses and starting to pay the owner for his labor. If all work were done at this rate, $120,000 could be produced annually less $80,000 for advertising expenses leaving $40,000 for business expenses and the owner. All referrals and repeating customers would improve that bottom line.
New companies should continue using a source with this return until it can be replaced with a more profitable one.
Quality of customers
What are you getting when you purchase customers through advertising? All customers are not the same. As you find more sources than you need, you can choose the best. The obvious determining factor will be the source which has the best ROI. But, there are other factors that can influence your choice.
It may be worth paying more for an ad if it produces better customers. For example, customers who are more likely to repeat are far more valuable than one-timers.
Other factors that make a difference include average job size, chance of referrals, level of soiling and the complexity of travel and setup of the jobs.
Bear in mind the ultimate goal: To build a repeat and referral clientele.
Getting enough customers has always been the biggest challenge facing startup companies. Until now, a reliable plan for building a clientele has eluded many. The longer it takes to establish a steady flow of profitable customers, the greater the risk is to the company.
Source-based marketing provides a new and fast, step-by-step process to defeat this challenge. This process can be completed in a matter of months instead of the years it has taken most companies in the past. There is no longer a good excuse for a new company to struggle now that this solid plan exists.